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Oil Prices to Drop 30% in 2018? This 1 Factor Makes a Strong Case Lombardi Letter 2018-02-01 16:08:36 Oil prices could end up disappointing investors in 2018. This could be mostly because of one specific economic problem in the oil market. Here’s what you need to know. Commodities,Oil https://www.lombardiletter.com/wp-content/uploads/2018/02/iStock-598822526-150x150.jpg

Oil Prices to Drop 30% in 2018? This 1 Factor Makes a Strong Case

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Oil Prices to Drop 30%?

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Oil Prices to Tumble Lower on the Back of Increasing Supply

Oil prices could be headed for a big downturn in 2018 and beyond. If you are bullish, you might want to rethink your take.

The oil market is facing a basic economic problem and this could mean much lower oil prices. The supply side of the oil market is getting stronger.

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There’s one thing investors need to pay close attention to: U.S. oil production.

Consider that in November, U.S. oil production amounted to 10.03 million barrels per day. (Source: “U.S. Field Production of Crude Oil,” U.S. Energy Information Administration, last accessed February 1, 2018.)

So, what?

U.S. oil production has rapidly increased. In January 2010, U.S. production amounted to just 5.4 million barrels. In other words, in roughly seven years, oil production out of the U.S. has doubled. Mind you, the last time the U.S. was producing 10 million barrels was back in 1970!

$60.00 Is the Magic Number to Keep in Mind

But don’t just stop here. Know that $60.00 a barrel is the “magic number” for oil prices.

At this level, a lot of shale production becomes feasible to produce.

What do you think shale oil companies will do? It’s not rocket science. Shale oil producers were struggling for the past few years. They could be producing a lot more and cash in as much as they can.

As a matter of fact, we are starting to see them ramp up production very quickly. The rocky mountain region of the U.S. is known for its shale oil production. If you look at the production as oil prices have soared, it’s very evident that these producers want to cash in.

In January of 2017, when oil prices were trading at around $50.00, the regional production was 621,000 barrels a day. (Source: “Rocky Mountain (PADD4) Field Production of Crude Oil,” U.S. Energy Information Administration, last accessed February 1, 2018.)

In November, production was 790,000 barrels a day.

If you do simple math, this represents an increase of 27.25% in just a matter of 11 months.

Now, think from a global perspective. Over the past few years, when oil prices were facing severe scrutiny, oil producers around the world were struggling. For example, there were even concerns if countries like Saudi Arabia will have issues remaining solvent.

Now, with oil prices up 150% above their lows, don’t you think they might want to lock in some cash by producing and selling as much as they can?

Oil Prices Outlook for 2018: Limited Upside, Massive Downside

Dear reader, 2016 and 2017 were great for oil prices. I highly doubt that 2018 is going to be the same.

When I look at the supply side, I can’t help but be bearish on oil prices this year. Production is increasing much quicker than demand. And, if you know basic economics, this is a perfect recipe for lower oil prices.

How low could oil go in 2018?

Remember, during sell-offs, asset prices usually drop to the nearest support level. If that level breaks, it reaches for the next support level and so on so forth, until buyers start to come in.

For oil prices, the closest major support level isn’t until $54.00 area. If we assume that’s the level oil prices drop to in 2018, it means a decline of over 16%.

I believe the real support level on oil prices isn’t until $45.00. If that’s where we end up, then it means a decline of over 30%.

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